1. A real commitment. Like for many new VCs operating at the Series A level, the biggest shock to the system was the realization that one gets to make very, very few investments – basically two or three a year. You quickly find yourself having to choose between a number of opportunities you really like. Making a new investment is a big deal, and a decision that one has to live with for years to come. You also get to work with an entrepreneur very closely, and live up to their level of trust and expectations. In a way, it feels like a marriage, except one where divorce is not really an option. There’s an occasionally brutal asymmetry between the fundraising process (which can be quick and intense, especially if it is competitive) and what happens afterwards, which is a lot of hard work over a long period of time. Both the entrepreneur and the VC would be well advised to get to know who they’re about to work with for the next few years of their lives. You don’t need to be friends with your VC (although friendships develop over years of working together), but you do need a core of mutual respect and commitment to hard work and excellence, as well as a shared vision of the future.
2. Conviction, not data.
Early stage VCs (seed and Series A) operate in a daunting scarcity of data points. You get a few numbers, a few meetings with the founders, and also you see a bunch of companies, so you get a sense of how an opportunity compares to others. Other than that, and for all the thinking about data driven VC investing
, the reality is that investment decisions are mostly about storytelling and forming personal conviction – painting a vision of the world where a company becomes hugely important. One consequence for entrepreneurs to bear in mind: VCs are really hungry for any data point that can help them. It’s certainly true about the “big things” (revenue, traction, etc., especially as they compare to other opportunities the VC is seeing), but it’s also true for the “small things”, which can become become disproportionately important (particularly if they add up), as the VC is trying to piece together a story: whether that’s signs of possible greatness (e.g., your former boss really insisted on putting $50k in your new venture) or trouble (being rude to the receptionist, consistently taking forever to reply to emails, etc).
3. Not a single way to reach conviction: VCs come in all sorts of flavors – some successful investors are deeply analytical (build roadmaps and investment thesis, get into details) while others are more “social” (relying on networks of trusted experts they’ve built over years to help them identify signal from noise). What’s been interesting to me is that you find very successful investors on both sides of the spectrum, and also find those different types happily co-existing within the same firm. Naturally, everyone is also heavily influenced by their professional history (what worked for them in the past as an operator or investor), as well as all sorts of personal criteria that often have nothing to do with the intrinsic merits of an opportunity – for example, the bar for a new investment will be naturally higher if an investor is already on 12 boards and always on the brink of being overwhelmed by the amount of work they face. For the entrepreneur, it’s always a good idea to understand who they’re pitching to, as in any sales process, as an investor’s personal circumstances and background matter immensely.
4. VC firms are not a monolith. Once an individual investor has reached personal conviction, they need to sell it internally to get the deal done. Because of the scarcity of data points and the range of personal styles, most investment decisions can be argued either way, and they often are. VCs are opinionated people, and there’s a fair amount of disagreement behind the scenes happening at firms during the discussions leading to an investment decision, which is a healthy thing, as you need checks and balances. Many firms have reported that the most successful investments in the long run are the ones that were initially the most polarizing internally. Depending on the firm, internal politics may come into play as well (glad to report that FirstMark is remarkably immune to this). But, bottom line, decisions can come out either way quite easily, so for entrepreneurs, there’s certainly a numbers game involved. Unless no one wants to take a first or second meeting (in which case there’s probably a deeper problem), it’s quite possible to get turned down by many firms before finding the one that will say yes (which can absolutely be a bigger name firm that the ones that said no).
5. “Deal dynamics” matter a lot. One really interesting aspect of seeing “how the sausage is made” on the VC side is to realize that the intrinsic merits of the opportunity is only a part of the equation. There’s also this thing called “deal dynamics” that VCs talk about all the time — basically a catch all for all sorts of criteria related to timing, valuation, competition and to some extent, stage, geography and seasonality as well. Because they see so many opportunities, VCs need to have strong filters in place about what makes sense for them – how they think about portfolio construction, ownership percentages, etc., matters a lot. Here as well, this means that there is a number of reasons why an opportunity may not be a fit for a specific firm which have little to do with the fundamental merits of that opportunity. Sounds like horrible VC bullshit, but it’s very true: a VC’s decision to “pass” is quite often not personal.
6. The VC world is really small. While there are thousands of startups around at any point in time, there are only a few hundred active VC firms, which typically only have a handful of General Partners. People come in and out of the industry all the time, VC firms rise and fall, but for the most part, the core remains the same and many people are around for years (or decades). And it’s a pretty tight knit world: there’s all sort of ways for VCs to meet (panels, industry conferences), socialize (informal small group dinners) and work together (sitting on boards together, switching firms, occasionally personally investing in each other’s funds, etc.). As a result, the industry is characterized by a deep connective tissue, full of history, institutional memory, cliques and alliances. There’s this interesting “coopetition” dynamic where people sometimes compete, sometimes collaborate, but overall everyone tends to know each other well. As a result, information often travels easily and quickly, although not necessarily reliably. Facts can be checked, and reputations matter immensely. For entrepreneurs and VCs alike, there are some real benefits in handling difficult situations elegantly, fairly and transparently, as it’s all a long term game in a small echo chamber.
7. VCs do things I hadn’t realized they did. It’s perhaps obvious in retrospect, but one surprise to me was that VCs spend an awful lot of time raising money – you’d figure that as an early stage VC, you’d be the one investing the money but the reality is that, once you’ve made the initial investment, you find yourself involved in all sorts of fundraising processes for follow on rounds for your companies, so you end up hat in hand alongside your entrepreneur. Another unanticipated aspect of the job is that VCs can really help with exits – particularly not-so-great ones. It’s something that doesn’t make great press stories and that people don’t like to brag about, but behind the scenes, I have seen good VCs spend a lot of time engineering exits for companies that need to “find a home”. That often makes the whole difference between a complete disaster and a “soft landing” or an acqui-hire that occasionally nets the founders some real money. Of course, the VC is self-interested (optimizing for results and reputation) but in my opinion, just that is a real reason to take VC money.